Not so wound up over the Apple Watch.

Photographer: Adrian Moser

Can the Swiss Make a Smarter Watch Than Apple?

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Swiss watchmakers seem to be scrambling to respond to the challenge posed by smartwatch producers after ignoring them for years. The perceived slowness to embrace the wearable revolution isn't ignorance or hubris. It's marketing wisdom.

Swatch's smartwatch project and TAG Heuer's plan to join with Google and Intel to make a wearable computer are often billed as alternatives to the much-hyped Apple Watch. The truth, however, is that even before Apple unveiled its product, Deloitte reported that 44 percent of Swiss watch executives considered smartwatches "the next big thing" for their industry.

The finding is somewhat puzzling in light of how the industry makes most of its money: Last year, two-thirds of export revenue came from watches costing more than 3,000 francs ($3,080). 

Existing smartwatches fall into the lower two price segments, whose combined contribution to Swiss horology exports is a mere 13 percent. Apple's basic offering, at $350, is more expensive than the others but still in the same range.

Sure, Apple is making a foray into more-expensive territory with gold watches priced at more than $10,000, but that's not really a threat to traditional  watchmakers. According to Deloitte, Swiss watchmakers described the "watch of 2015" as a classic steel chronograph priced at about 5,000 francs. Over the past few years, customers have favored steel over gold. When it comes to the top-price segment then, Apple will be catering to yesterday's tastes.

Why, then, is the industry so acutely interested? The answer is that it wants to hang on to current sales volume as well as revenue. Last year, Switzerland made four times more money exporting 8.1 million mechanical watches than it did from exporting 20.6 million electronic timepieces. Yet most of the industry's roughly 60,000 workers are engaged in making the cheaper electronic products.

Electronic-watch sales, however, are in decline: In 2000, exports of quartz watches reached 27.2 million units, almost a third more than last year. Many people no longer use a watch for its primary function -- to tell time. A mobile phone is perfectly good for that, and people naturally apply Occam's razor to the number of gadgets they carry around. 

Though Swiss watchmakers are flexible about hiring and laying off workers -- they shed 9 percent of 53,300 workers between 2008 and 2010 -- job losses would be heavier if smartwatches superseded quartz timepieces. That's what Swatch co-inventor Elmar Mock fears if, as he predicts, Apple succeeds in selling 20 million to 30 million watches, a comparable number to the entire Swiss industry's 28.6 million watches in 2014. 

The problem, however, isn't limited to potential layoffs and losses for the cheaper watch brands. Swiss horology uses quartz timepieces to lure first-time customers. If you wore an entry-level Swiss watch as a student or a young professional, chances are you'll buy a more expensive one when your income allows it.  

If the industry loses its stepping stone to Apple, Samsung and other wearable-tech makers, sales of Swiss masterpieces will eventually decline. More than half of Swatch's sales come from inexpensive watches; the loss of that market would be catastrophic for the company. High-end timepieces bring in another 30 percent of sales, so that part of its business could also be undermined by Apple. Swatch is interested in making its offerings "smarter" for both reasons.

TAG Heuer, a luxury brand, is also seeking a new entry-level product, perhaps because the cheaper brands haven't advanced much in the smartwatch world (though a number of such offerings were seen at this week's Baselworld exhibition). New-generation quartz watches boast activity-tracking functions and will soon have payment technology.

Swiss watchmakers haven't really slept through the wearable-tech revolution. They've been watching as others did their market research for them. They can afford to wait: Export sales of high-end watches last year totaled 13.8 billion Swiss francs compared with just 3.1 billion francs in 2000. The industry has time to ponder strategies, play with designs and selectively choose from the new functions the Silicon Valley giants develop.

In other words, Swiss horologists are well positioned to out-Apple Apple. They are beginning to introduce new products after their competitors jumped in first. Swiss attention to detail can only be good for the emerging wearable industry, which, even with Apple on board, is still flying by the seat of its pants. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Paula Dwyer at pdwyer11@bloomberg.net